Taxpayers Under IRS Audit Urged to Apply for VCI

Penalty Waiver Program Ends April 15

State Controller and Franchise Tax Board (FTB) Chair Steve Westly today
urged corporate and individual taxpayers who have used abusive tax shelters or who are under
federal audit for abusive tax shelters to participate in the state's Voluntary Compliance
Initiative. This program, which allows taxpayers to voluntarily amend their tax returns
before harsh penalties take effect, will come to an end on April 15.

"Although many Californians may have unwittingly used illegal tax shelters,
they still need to come forward now in order to avoid tough penalties that kick in after
April 15," Westly said.

California has recently obtained thousands of leads from the Internal Revenue
Service, states, and other sources that help identify investors, promoters, and tax schemes
involved in sheltering income.

Legislation signed in October 2003 (SB 614, Cedillo & Burton; AB 1601,
Frommer) provides the FTB with more enforcement tools to curtail the use of abusive tax shelters.
Among other enforcement provisions, the new law greatly increases penalties for investing in
illegal tax shelters.

The Voluntary Compliance Initiative is a one-time chance for taxpayers who
used abusive tax shelters to come forward and amend their state tax returns before the state
starts pursuing the harsher penalties authorized by new law. To date, the FTB has collected
more than $1361 million through this program.

Estimates show California loses $600 million to $1 billion in tax money
annually through abusive tax sheltering. Abusive tax shelters are transactions marketed with
the promise of tax benefits with no correlating economic losses. Most involve the use of multiple
layers of domestic and foreign pass-through entities such as partnerships, S corporations, and
limited liability companies.

To learn more about the FTB’s Voluntary Compliance Initiative, visit our
Website at www.ftb.ca.gov.